Over at the Standard they discuss Bill English’s statement that we will become a “nation of savers”. Now their attack line is relatively weird, especially given that he is just saying that if we need a bigger deposit to buy a house we will have to save it – he doesn’t say we should take on policy that imply “save more”.

However, he illustrates a strange view that National have of savings when he suggests that tax cuts will lead to an increase in savings – it will increase private savings but it is also dis-savings for the government, hence it will lower national savings (unless you believe it will magically cause a massive increase in economic activity).

Obviously the term “savings” is being used in a loose way – which is also “loaded” in the sense that these people assume that an “increase” in savings is a good thing.

I think it would be good if we review a series of posts which was (and eventually will be extended into) our “productivity series“. In the four posts here we discuss Kiwisaver, national savings, and what savings is.

Ultimately, if savings are “too low”, as both the Standard and National might feel, it must be because of a market failure. The ways this failure could exist are discussed in this post.

The Standard appears to believe that Kiwisaver is a solution to our “savings problem” – however, I don’t think this is exactly an obvious point. For one, the way Labour set up Kiwisaver it is unlikely it would increase national savings. If we care about national savings because we want more capital we have to ask, why? A current account deficit shows that we are managing to borrow internationally to get our capital and consumption – if the interest rate is low why not use it!

We cannot complain that consumption is too low, savings are too low, and that the current account deficit is too high unless we want a MASSIVE decrease in capital accumulation – is that what all these guys support?

Of course, I think a better argument in favour of Kiwisaver (even beyond time inconsistency) is that it helps to change the “allocation” of savings into capital. Of course this presumes that the current allocation (namely into housing) is inefficient in some way – if we can make that argument, and we can show that we can’t directly fix imperfections in the market to get us to the first best solution – then Kiwisaver may be useful.

This argument does not support the subsidy loaded, bloated, Kiwisaver that was given to us – it supports a version of Kiwisaver that offers a voluntary opt out and a market rate of return on savings, but with funds going to firms more closely integrated with the general equity and bond markets.

Ultimately, I think both sides of the political spectrum need to straighten out their ideas surrounding “savings”. Determine what you think the market failure is – then we can discuss how to fix it.

If you can’t figure out a reasonable market failure, savings aren’t too low!

“I was saying it is hypocritical and weird to cal for savings while cutting a large savings program in half. ”

He appeared to be saying that savings WOULD rise, not that savings SHOULD rise. As a result I don’t see the hypocrisy.

“There’ s a logical flaw, albeit a common one, in assuming that someone who opposes a change thinks the status quo is perfect.”

My criticism wasn’t of your belief that removing subsidies from Kiwisaver was a bad thing – my criticism was of the belief that I said the Standard “might” hold that higher savings levels were socially optimal. I in no way said that you thought the status quo was perfect – in fact, that would have been irrelevant to my argument.

Matt matt matt. Here and I thought you were a good economist with a grasp of the real world. 🙂

In your words there is “Market failure causing a sub-optimal distribution of savings.”

There is a market failure caused by inadequate regulation leading to NZ investor lack of confidence in equities and overinvestment in housing. I make that bald statement in the knowledge that you can do the comparisons of housing vs equity investment in New Zealand vs other markets.

The reason why it matters can be illustrated by the following example.

We both own large partly developed farms with small adequate houses. We both work equally hard and equally long hours. At the end of the year we have both made the same profit. You invest it in starting to build a small extension to your house and new soft furnishings for the wife.

I reinvest my profit in a tractor and fertiliser to make my farm more efficient. At the end of the second year I make a higher profit. Over the next 5 years you continue to make small improvements to your house from your smaller profits.

Over time I will accumulate far higher wealth than you because my farm is more productive. To the point where I can employ farm workers and have more leisure. You are still working hand to mouth.

That is the real world situation in New Zealand. Spending on houses is not productive investment. It is long term consumption not investment. But you have been taught that any spending over a year is capital investment. That is simply not the reality. There is an enormous qualitative difference between productive investment and long term consumption

“reading that again I might sound a bit harsh and imply some straw man arguments you did not make. sorry if it does. ”

Don’t worry – the smiling face implied to me that you weren’t being aggressive 🙂 Thanks for the apology in any case 😉

“Perhaps my point is accepting and being clear there is a market failure would be a good first step.”

When developing policy we should accept that there is a market failure – once we specify that we can figure out what the best solution is. However, when government simply states there is “sub-optimal savings” it does not face the market failure – and so I don’t see where the policy is coming from.

Now, I see that your argument is that we have an “over-investment in housing” and an “under-investment in equities and productive capital”. If this is the case (which it is commonly said to be) then it is an issue of composition, not the level of savings.

As a result, if that is what is occurring we are actually agreeing! This is what I said above:

“Of course, I think a better argument in favour of Kiwisaver (even beyond time inconsistency) is that it helps to change the “allocation” of savings into capital. Of course this presumes that the current allocation (namely into housing) is inefficient in some way – if we can make that argument, and we can show that we can’t directly fix imperfections in the market to get us to the first best solution – then Kiwisaver may be useful.”.

Of course, I would also note that housing is a “productive asset” as it produces the “somewhere to live” service. Now, it is over-priced at the moment, and it could be true that people are excessively moving their funds into housing – however, if that is the market failure government should make it clear and then try to deal with that – instead of saying that “savings is too low” 🙂

George Bolwing

Matt

The focus on net national savings is very important.

The Australian experience is telling. They have had compulsory savings for almost 20 years now, and while the amount of household assets has gone up markedly, so too has the amount of household debt.

My take on this is that households are being completely rational. Their life-time income has not changed as a result of the forced savings regime, nor has their discount rate or their preference set. Thus, they will largely continue with the same consumption pattern. “Largely” because there are transaction costs and there is some uncertainty about whether the future income stream from the forced savings will materialise.

The net effect, via a long process of financial intermediation, is probably that households are borrowing from themselves to finance the consumption stream they would largely have had without the scheme.

And the tax concessions given to savings mean that Government savings is less.

And Australia is still running a large current account deficit, meaning that they are still borrowing from the rest of the world (and like you, I have always thought that they fact that a country has more productive investments than it can finance via domestic savings is a cause for celebration, not concern).

I agree with what you have said 100% – if it appears I am saying anything different it is a function of my poor writing style 🙂

I would note that:

“The focus on net national savings is very important.”

However, the idea that “net national savings” is arbitrarily “too low” makes little sense to me unless the government can state what the market failure is.

Furthermore, once they know the market failure is they should deal to it directly – the fact that Australians appear to be borrowing on their compulsory savings is evidence that simply trying to target net savings directly is not only illogical, it is a fools game 🙂

Kimble

I wish iPredict would set a line on how many posts before all the authors at TVHIE stopped being surprised by the silly attack lines taken by The Standard.

Just look at robinsods response to this post. He ignored everything you said and tried to associate your argument with child slavery.

This is the audience of The Standard. This is who those authors are pandering to. They are not rational people. Any of them.

“I wish iPredict would set a line on how many posts before all the authors at TVHIE stopped being surprised by the silly attack lines taken by The Standard.”

I am not sure you would get a number that big. Let me be clear, I’m not “surprised” – I just act that way because it is a good way to start my posts.

The Standard and Frog Blog both cover issues in a way that is different to the way I see them – as a result it is likely that we will continue linking to them, in order to provide a counter-balance to our ideas.

I do agree that Robinsod’s comment here was ridiculous – however, when there is NO RANTING going on I enjoy hearing from the otherside of the debate, and Robinsod and Steve have mentioned a number of relevant points before.

By putting all the points together, people can make up there own mind which is fine by me – and that is also why we try to make it clear when something they have said is actually not true.

In a perverse way Robinsod’s sensationalist comment acutally illustrates the point Matt was trying to make, not that he would have reliased it….

We need to know what the desired optimal outcome is (i.e. level of sagings) before we can say the current situation is sub optimal (i.e. too low). He was just picking things that most of us would agree on what the optimal outcome is. I.e. if we all agree that we shouldn’t have child slavery and there is child slavery , then clearly the situation is sub-optimal.

Picking a bunch of emotive situations where the optimal outcome is clearly known doesn’t in any way invalidate trying to analyse what the optimal outcome is for savings…

Note to self: economists have no capacity to understand a point made through metonymy.

Now – What I was trying to point out was the determination of “market failure” is an entirely subjective point. I’ve also noticed that your working definition of “market” seems to vary quite considerably.

For instance, in this piece, you seem to be simultaneously claiming that optimal savings are decided by the market but then claiming that the market needs directing by people who have made a decision on what exactly “optimal savings are” – in this sense you are at once describing the market as the totality of the environment we operate in (in which case there should be no need for an “optimal savings” decision to be made as it is already being approached by the the market) and as the tool we use within this environment to produce the outcomes we desire.

If you stick with the former definition then the claim that people need to “look for the market failure” is absurd as economic agents within the market are by definition unable to identify “market failure” as they cannot act anterior to the market.

If it is the latter then the notion of “optimal savings” is strictly subjective and as such all opinions (including yours) on whether we have “optimal savings” or not stem from a non-market set of cultural and ideological principles (such as free-market principles) that have little or no basis in an objective reality.

Also, if you stick withing the first definition then the selling of children (as has and does occur) becomes a non-morally loaded outcome of a functioning market at a particular point in time. So too slavery. And if this is the case then there is no market failure and thus no problem.

The market is merely the sum of individual action, given an institutional framework (that is partially determined by individual action) – the definition of which is constant.

In this case, the government acts as an exogenous agent which can change the incentives and institutional structure that agents in the market face.

“For instance, in this piece, you seem to be simultaneously claiming that optimal savings are decided by the market but then claiming that the market needs directing by people who have made a decision on what exactly “optimal savings are””

When did I say that the “market determines optimal savings” – I said that we need to describe how the market is different from a counter-factual situation where savings are determined “optimally”.

Now I agree that the term “optimal” is subjective, but you can never discuss policy without subjectivity. You can argue with my notion of optimality – but you seem to be stating that we can’t even try to look at what optimality is, which implies to me that we can NEVER MAKE A POLICY RECOMMENDATION.

Also lets be clear, I am not stating that the market is optimal and it is failing, I am merely comparing an actual market to my counter-factual market. If we didn’t create a counter-factual I do not know what we could state something was “too low” or “too high”.

In my counter-factual market savings is determined such that fully informed individual are making choices on how much to borrow and save based on a market rate of interest which represents the behaviour of the capital market. There is a consensus among economists and many politicians that this would be the level of savings we should target – given that we can compare elements of this market to elements of our real world market in order to figure out why, and how, savings differs.

“Also, if you stick withing the first definition then the selling of children (as has and does occur) becomes a non-morally loaded outcome of a functioning market at a particular point in time. So too slavery. And if this is the case then there is no market failure and thus no problem.”

You seem to be determined to make analysis either completely objective or completely subjective. The value we place things MUST be subjective, however the description of the situation we are in should have some semblance of objectivity (given the difficulty accessing truth and facts, objectivity is a hard puppy to get).

Merely stating that I’m being subjective does nothing to counter-act my argument – you need to actually state what subjective assumptions you believe are WRONG. Doing this will allow us to discuss our points and gain a fuller understanding of how we feel.

Tell me, in the examples you gave above you took something that we know, from introspection, is wrong and tried to talk about it in the same light as savings. Do you really believe that savings are “too low”, do you have an internal moral compass that tells you we as a society should “save more” – as you would have a moral compass telling you those other things. If you don’t, then you were not using a metonymy as the substitution does not fit. If you do, then I would like to hear why.

Kimble

“Merely stating that I’m being subjective does nothing to counter-act my argument – you need to actually state what subjective assumptions you believe are WRONG.”

Can I suggest that those of you wanting to understand more about the negative effects of over-investment in the housing sector and the status of our tax system (pre 2008) please read the “McLeod Tax Review 2001”.

Really good stuff in there…

It states that the problem is not necessarily the level of savings, but the composition of savings – hence over-investment in housing is a major problem – brought on partly by the lack of capital gains tax (among other things).

I also like a few things Phil Sage mentioned. I think NZ business has a fundamental problem in acquiring equity finance. There are plenty of great business opportunities out there but little infrastructure to navigate these opportunities.

“It states that the problem is not necessarily the level of savings, but the composition of savings – hence over-investment in housing is a major problem – brought on partly by the lack of capital gains tax (among other things).”

Indeed.

“I think NZ business has a fundamental problem in acquiring equity finance”

Outside of compositional issues regarding domestic savings I’m not sure that this is the case. The question we have to ask is “does the difficulty with firms sourcing credit represent the risk associated with their business”?

If firms have not been able to source credit in the recent loose environment, then I think that says more about the position of their balance sheet than about domestic equity markets – I feel that the criticisms of equity markets in NZ is a bit overplayed.

“There are plenty of great business opportunities out there but little infrastructure to navigate these opportunities”

What type of infrastructure? Are you talking about the structure of equity markets in NZ?

Equity markets in NZ are notoriously thin – which is problematic for the dissemination of new information.

However, if we aren’t big enough to support our own stock exchange why don’t we integrate with Australia – the NZX can’t have it both ways, it can’t be struggling to function as a market and selling its ability to preform functions outside of the ASX.

Ultimately, I agree that we don’t want to distort peoples incentives when it comes to saving – but complaining that people aren’t choosing “productive” assets is silly, because all assets are productive in some sense.

If we give savers good information, and we patch up our tax system to remove distortions, then the flow of savings will be what is in SOCIETIES interest – which is the ultimate goal.

I prefer to see the savings issue in slightly broader terms. I agree that the level and allocation of savings and the method for its accumulation is important in terms of productivity growth but we shouldn’t ignore personal financial security.

It seems to me that the great Australasian home ownership obsession is about having retirement income mostly. The fact that this might constrain national productivity is of secondary importance to most individuals. Australian demographic forecasts suggest despite the arrangements here, deteriorating work/beneficiary rates are a real challenge.

I agree Matt’s premise that depending on the cost of international finance, comparatively low national savings mightn’t be the problem it appears however I suspect the current “crisis” will serve only to reinforce traditional values. This, plus the silly pre-election politicing by English, is why I completely understand where Steve’s coming from.

Low growth, low trade-intensity and small population are the root-cause of NZ precarious economic future but financial security is probably an overwhelming personal driver. Hands-up if you’re using the rate cuts to buy more or reduce your mortgate?

I’m still not sure – criticising someone for merely stating that lower house prices will lead to higher savings rates doesn’t make sense. Next someone could write a post criticising me for saying that, when there are no clouds in the sky and it is daytime it generally looks blue.

I still don’t think it is transparent to attack the fact that we have had a “lowish” savings rate – not that consumers and businesses have brought/invested up large when prices (and the cost of borrowing) were low, sounds pretty sensible to me

Shouldn’t household’s internalise the risks associated with their lifetime income stream?

I’m not sure I follow? My point was that the tendency for investors to preference housing over other more liquid assets was a function of cultural values relating to anticipated retirement – it’s a decidedly middleclass ambition to be mortgage free and have a nest egg sufficient to be unreliant on the pension.

I still don’t think it is transparent to attack the fact that we have had a “lowish” savings rate – not that consumers and businesses have brought/invested up large when prices (and the cost of borrowing) were low, sounds pretty sensible to me

It seems to me that there’s a conflation of a whole lot of factors; balance of payments deficit, low trade intensity, foreign-owned banks etc etc etc and deteriorating wage/beneficiary rates leading to a concern about savings. There may also be a switch between the personal and the global: shite loads of private and unsecured debt have got us into this trouble, my personal savings will get us out…?

I guess I come at this not as a professional economist; I value the view of economists – not least of all for explaining the backstory which can be impenetrable – but the rationality that pervades me and my mob is less predictable and possibly a whole lot more selfish (for now at least). I’m still interested to know how many people will not use their additional funds to reduce their mortgage.

“My point was that the tendency for investors to preference housing over other more liquid assets was a function of cultural values relating to anticipated retirement – it’s a decidedly middleclass ambition to be mortgage free and have a nest egg sufficient to be unreliant on the pension.”

Indeed – however, if they have a preference for some random reason we should allow them to satisfy it. The best society can do is tell people about the risks associated with housing etc. If they have an explicit preference for housing as a result and are willing to invest further in it then that is a “consumption” choice by the household.

“I’m still interested to know how many people will not use their additional funds to reduce their mortgage.”

That will be a key point. I hope that people do decide that they want to use funds to pay down debt from a personal point of view – however, if they don’t they don’t.

Ultimately, New Zealand must have a view that our incomes will eventually rise to a level comparable to first world countries. If that is a fair assumption then what is going on is fine – otherwise it might not be so much.

However, I don’t think government is in a better position to judge future income levels and individual preferences as well as individuals – hence why I think the concept of savings being “too low” is a bit of a misnomer.

I have no problem with the government setting bounds where they think there may be a problem – but I’m not sure if New Zealand has broken outside these bounds given the balance or risks and fair expectations about the future.